Supply Chain Management (SCM) 101: Supply Chain Strategy - Supply Chain Drivers, Facilities, Inventory, Transportation, Information, Sourcing, Pricing

What This Is

Supply Chain Drivers are the key elements that influence the performance and efficiency of a supply chain. They include facilities, inventory, transportation, information, sourcing, and pricing. Understanding these drivers is crucial in supply chain management as they impact the overall cost, service level, and responsiveness of the supply chain. For example, Amazon's ability to offer fast and reliable shipping is driven by its extensive network of fulfillment centers, efficient transportation systems, and real-time information sharing.

Key Frameworks & Formulas

• SCOR (Supply Chain Operations Reference): A framework for evaluating and improving supply chain performance across five process categories: Plan, Source, Make, Deliver, and Return.
• EOQ (Economic Order Quantity): The optimal order quantity that minimizes total inventory costs, calculated as ?(2DS/H), where D is demand, S is ordering cost, and H is holding cost.
• Safety Stock: The additional inventory held to mitigate stockouts, calculated as Z ×-× ?L, where Z is the Z-score,-is standard deviation, and L is lead time.
• Fisher's Model: A framework for classifying products into three categories: functional, innovative, and fashion, based on their demand patterns and supply chain requirements.
• Transportation Modes: The different ways of moving goods, including air, land, and sea, each with its own advantages and disadvantages.
• Inventory Turns: The number of times inventory is sold and replaced within a given period, calculated as COGS / Average Inventory.
• Lead Time: The time it takes for goods to move from the supplier to the customer, including production, transportation, and inventory holding times.
• Service Level: The percentage of demand that is met from stock, calculated as (1 - (Number of Stockouts / Total Demand)) × 100.
• Pareto Analysis: A method for identifying the most critical factors contributing to a problem, based on the 80/20 rule.

Step-by-Step Application

1. Calculate Safety Stock: Determine the Z-score, standard deviation, and lead time for a product. Use the formula Safety Stock = Z ×-× ?L to calculate the additional inventory needed to mitigate stockouts.
2. Optimize Transportation: Evaluate the different transportation modes available for a product and choose the most cost-effective and efficient option.
3. Implement a Warehouse Layout Change: Assess the current warehouse layout and identify opportunities for improvement. Use a framework such as the SCOR model to evaluate the impact of the change on supply chain performance.
4. Determine Inventory Turns: Calculate the average inventory level and cost of goods sold (COGS) for a product. Use the formula Inventory Turns = COGS / Average Inventory to determine the number of times inventory is sold and replaced within a given period.
5. Analyze Lead Time: Evaluate the lead time for a product and identify opportunities for reduction. Use a framework such as Fisher's Model to classify the product and determine the most effective lead time reduction strategies.

Common Mistakes

• Mistake: Assuming that all products have the same demand patterns and supply chain requirements.
• Correction: Use a framework such as Fisher's Model to classify products and determine the most effective supply chain strategies.
• Mistake: Failing to consider the impact of transportation costs on supply chain performance.
• Correction: Evaluate the different transportation modes available for a product and choose the most cost-effective and efficient option.
• Mistake: Not accounting for the additional inventory needed to mitigate stockouts.
• Correction: Calculate the safety stock required for a product using the formula Safety Stock = Z ×-× ?L.

Exam / Certification Tips

• Tricky Distinctions: Understand the difference between push and pull strategies, efficient and responsive supply chains, and Incoterms responsibility.
• Common Question Patterns: Expect questions on the SCOR model, EOQ, and safety stock calculations.
• Key Concepts: Focus on the key drivers of supply chain performance, including facilities, inventory, transportation, information, sourcing, and pricing.

Quick Practice Problem

A company sells a product with a demand of 100 units per day and a standard deviation of 10 units. The lead time is 5 days, and the Z-score is 2. What is the safety stock required for this product?

Answer: Safety Stock = 2 × 10 × ?5 = 20 units

Explanation: The safety stock is calculated using the formula Safety Stock = Z ×-× ?L.

Last-Minute Cram Sheet

• EOQ = ?(2DS/H): The optimal order quantity that minimizes total inventory costs.
• Safety Stock = Z ×-× ?L: The additional inventory held to mitigate stockouts.
• SCOR (Supply Chain Operations Reference): A framework for evaluating and improving supply chain performance.
• Fisher's Model: A framework for classifying products into three categories: functional, innovative, and fashion.
• Transportation Modes: The different ways of moving goods, including air, land, and sea.
• Inventory Turns = COGS / Average Inventory: The number of times inventory is sold and replaced within a given period.
• Lead Time: The time it takes for goods to move from the supplier to the customer.
• Service Level: The percentage of demand that is met from stock.
• Pareto Analysis: A method for identifying the most critical factors contributing to a problem.
• 'Postponement' delays final configuration, not production – it's a push-pull boundary strategy: A common trap in supply chain management.
• 'Just-in-Time' (JIT) inventory management requires a high level of demand forecasting accuracy: A common trap in supply chain management.